An attempt by lenders to Alrosa to increase charges for a $350 million one-year syndicated loan has triggered recriminations between the banks in the syndicate, and a categorical denial by Alrosa that it has agreed to pay more.

Morgan Stanley heads the syndicate, which also includes Bayerische Landesbank (BayernLB) and WestLB. BayernLB has recently reported heavy writedowns from exposure to high-risk derivatives in the US market. WestLB says it has been less directly affected, in part because it sold its risky securities portfolios to a special purpose vehicle, thereby ring-fencing the profit of the main bank.

BayernLB is one of the weakest of the German banks exposed to the current financial crisis; it reported this week that it will have “negative earnings before taxes of around EUR 1 billion for the third quarter”. The losses will grow in the fourth quarter, the bank has admitted.
It appears the initiative for the increased payment demand came from BayernLB, and that WestLB agreed to endorse it. Morgan Stanley claims it refused.

A source at Morgan Stanley told PolishedPrices.com that a standard clause in the loan agreement provides for increased charges in the event of a market disruption. If more than a third of the banks in the syndicate find that they are unable to obtain finance for themselves at the London inter-bank rate (Libor), then they can apply to their client borrower to pay an additional amount equal to the difference between the original loan terms and the new borrowing rate imposed on the lenders by the market disruption. In order to implement the market disruption clause, banks are reportedly trying to lower the threshold for agreement within the syndicate, in order to implement the additional payment demand.

According to Alrosa, it has received no request to pay more, and has agreed to nothing. Morgan Stanley also denies that it is invoking the market disruption clause itself. The bank declined to identify which other banks in the syndicate have done so.

A wire service report claimed that Alrosa was the first European firm to be identified in what was reportedly “a successful attempt to use the clause”. The report quoted one of the bankers as saying:
“Borrowers should have to pay up, they have had a free option for too long.”

Speaking for Alrosa, Alexei Polyakov told PolishedPrices that the company was aware there has been talk in the syndicate, but to date, it has gone no further than that.

Alrosa is already reported to be paying a margin of 225 basis points over LIBOR on the $350 million loan, signed in February 2008. As of December 31, 2007, the company’s financial reports indicate that short-term debt amounted to Rb49.5 billion ($2 billion).